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Morningstar | Growth Picks Up for Willis Towers Watson in 3Q

Growth picked up for Willis Towers Watson in the third quarter, led by the insurance side of the business. Excluding acquisitions, currency effects, and an accounting change, revenue increased 5% year over year. This marks a slight acceleration from recent results but is in line with our long-term expectations. We will maintain our $155 fair value estimate and narrow moat rating.

On the brokerage side, the Corporate Risk and Investment, Risk, and Reinsurance segments reported 4% and 9% growth year over year, respectively, excluding acquisitions, currency effects, and an accounting change. The particularly strong growth in the Risk and Reinsurance segment appears to have come, in part, from a spike in consulting work, which can be lumpy. Still, coming into the year, we had believed that an improving insurance pricing environment--following the flurry of natural catastrophes in 2017--would be a modest tailwind this year, and that appears to be playing out. While this year’s catastrophe losses look somewhat elevated compared with historical averages, they're still far lower than the industry saw last year. As a result, at this point, we think the tailwind will likely prove to be somewhat fleeting.

On the consulting side, the Human Capital and Benefits Delivery segments saw 2% and 10% growth year over year, respectively, excluding acquisitions, currency effects, and an accounting change. We believe the Benefits Delivery segment has the strongest long-term growth prospects on the consulting side, but at only 11% of overall revenue, its impact will be limited, with the mature Human Capital segment continuing to be a drag.

Excluding the accounting change and one-time items, EBITDA margins improved to 19.4% from 17.4% last year. We are encouraged to see the company execute on the cost synergies management identified as part of the merger of the two firms. Management noted that it believes it can deliver a further 50 basis points of margin improvement in 2019, which supports our view that the business model can continue to deliver margin expansion over time but also that gains will be much more modest.